Ingle Company paid $12,960 for a four-year insurance policy on September 1 and recorded the $12,960 as a debit to Prepaid Insurance and a credit to Cash.What adjusting entry should Ingle make on December 31,the end of the accounting period?

Question

Quizplus · Accepted Answer

The adjusting entry required on December 31 is to recognize the portion of the insurance policy that has been used up/expired. The insurance policy was for four years, and as of December 31, only four months have passed (September, October, November, and December).

To calculate the amount that has been used up, we need to divide the total cost of the policy by the number of months it covers and then multiply by the number of months that have passed.

$12,960 / 48 months = $270 per month
$270 per month x 4 months = $1,080

Therefore, the adjusting entry on December 31 would be to debit Insurance Expense for $1,080 and credit Prepaid Insurance for $1,080. This reduces the Prepaid Insurance balance to reflect the portion of the policy that has been used up, and records the expense in the period it was incurred.

Ingle Company Paid $12,960 for a Four-Year Insurance Policy on September